“Reduced budget, narrowed scope”, upheaval in government venture R&D support, ‘confusion’ in the industry

R&D support budget for small and medium-sized enterprises decreased by 22.7%, and the areas of support were also reduced
Budget focused on specific areas such as private sector leadership and strategic technology, venture industry in 'emergency' mode
Will healthy companies collapse and ‘zombie companies’ be born? Market concerns intensify

A significant change in government venture and startup R&D (research and development) support policies has been detected. The policy was revealed to reduce the scale of R&D support compared to the previous year and to focus the budget on key areas such as private R&D, R&D in strategic technology areas, and R&D for global innovative companies. On the 16th, the Ministry of SMEs and Startups announced that it would announce the ‘2024 Small and Medium Business Technology Development Support Project’ containing the above contents. 

Reduce overall budget and focus on ‘selection and focus’

The government’s R&D investment budget for small and medium-sized enterprises this year is KRW 1.4097 trillion, a 22.7% decrease compared to last year (KRW 1.8247 trillion). The reduced budget will be distributed in a ‘one shot’ format to key areas selected by the government. First, a budget of 168.6 billion won was allocated to private R&D. In particular, in the case of TIPS, a total of 120.1 billion won will be supported, including △80.7 billion won for general type and △39.4 billion won for deep tech TIPS. The amount of support actually increased compared to last year (KRW 85.9 billion). Scale-up TIPS for innovative companies will receive 38.6 billion won, 35.4% more than last year.

62.1 billion won will be supported for R&D in the strategic technology field. In the future, the government plans to establish a separate track to support leading future innovation technologies with relatively large ripple effects, such as △AI (artificial intelligence), △autonomous driving, and △aviation and space, through linkage with the 12 major strategic technologies. A budget of 26.7 billion won was allocated to support R&D of innovative companies with global expansion capabilities such as overseas certification and export performance. In addition, we plan to introduce a new ‘competitive R&D’ method that develops the same goal in different ways and select and support companies with global competitiveness.

In addition, the government plans to promote R&D projects exclusively for global startups established for the purpose of entering the global market and to create a global R&D cooperation base for small and medium-sized enterprises to advance into the global market. We will also pursue system improvements to improve R&D business operations, such as strengthening the expertise of R&D selection evaluation and strengthening the verification system for similar and overlapping support.

“Suddenly support was cut off” A red light in the venture industry

As the government’s R&D support budget and scope plummeted, an ’emergency’ went into the venture industry. Companies that had continued to invest in research, relying on government support, suddenly lost their driving force. According to the notice, the budget cuts target 24 out of 47 R&D projects of the Ministry of SMEs and Startups. In particular, for 22 of the 24 projects subject to cuts, the reduction in project costs amounts to as much as 50%. The reduction levels for the remaining two projects are 20% and 25%, respectively. The number of R&D projects under the Ministry of SMEs and Startups that are subject to budget cuts is close to 4,000.

The industry is criticizing the government for recklessly cutting the budget without considering project performance and necessity. It is pointed out that in order to achieve the original goal of ‘R&D budget efficiency’, a thorough ‘picking out the rocks’ should have been carried out, taking into account the progress and importance of each task. An official in the venture industry who heard the news of the budget cut said, “The government has poured cold water on the entire industry by trying to cut out ‘zombie projects’ that are in a hurry to make up for the budget,” and added, “It is like trying to catch fleas and then burning the grass.”

As the reduction in project costs is significant, it is predicted that the number of companies that will be forced to give up tasks that have been in progress for a long time will increase in the future. In fact, according to the results of a survey of R&D companies conducted by the Small and Medium Business Technology Information Promotion Agency in October last year, 25% of the responding companies answered, “We will stop the project if research and development expenses are reduced.” In particular, for companies whose core business has been hit by budget cuts, there is a possibility that they will not only give up on tasks but also face threats to their market survival.

Concerns over mass production of ‘zombie startups’ in key fields

Some are concerned that zombie startups may be mass-produced in areas receiving “intensive support” from the government. This means that so-called ‘floating businesses’ (illegal business practices of taking unfair profits for a short period of time and then fleeing to another region), which run bare-bones businesses in order to win government support, may emerge. Zombie startups refer to startups that survive on government subsidies without any significant profits. It is an empty business that barely maintains its form and continues to use the government budget without making any attempts at innovation.

If a company lacking the capabilities that should naturally be eliminated from the market survives with government support, there is a risk that the growth of the entire startup ecosystem will be hindered. This is because the tendency to simply focus on survival without establishing special survival measures or taking risks is highly likely to spread like a ‘zombie virus.’ In particular, if this phenomenon occurs in strategic technology fields where immediate technological capabilities and innovation are desperately needed, the blow will spread to the level of national competitiveness.

Meanwhile, some in the industry are pinning their hopes on the government’s improvement of the system. As there is already a record of tens of billions of won worth of government subsidies being used for ‘mass production of zombie companies’ during the Moon Jae-in administration, it is expected that further strengthening of R&D projects will be given further impetus in the future. Some say that in order to prevent the emergence of zombie companies, there is a need to reduce report-centered paper work requirements and come up with a more effective ‘identifying the rocks’.